According to Credit Suisse, earnings estimates are coming down again. Its January consensus estimate for FY14 EPS ticked upwards but this seems like a head fake and there would be another 8%-10% downside in coming quarters.

During the third quarter (Q3) that ended in December 2012, sales growth of Nifty companies slowed to 10%, a new post-crisis low, which also affected the stock markets. Most stocks are now trading close to where they were in September 2012 and there is no turnaround from here, says Credit Suisse in a research report.

According to the financial services provider, the Indian stock market was very discerning during the third quarter as companies that beat estimates did exceptionally well after results while companies reporting in-line or weak results were beaten down. However, many of the bad results seemed to have been well flagged.

Of the 113 stocks that Credit Suisse India covers, formal quarterly previews were published for 78. For these 78 companies, combined reported net profit was 3% below estimates. Only oil & gas companies like Reliance Industries, GAIL and ONGC and IT services and financials, mainly private banks, and some public sector banks (PSBs) that had dropped non-performing loans (NPL) coverage had results better than estimates. There were large disappointments in most other sectors, it said.

The minor recovery in the year-on-year (YoY) growth trend of operating profit was short-lived. It turned downward again, as the number of companies seeing outright operating profit decline increased sharply. “With Nifty operating margins still below March 2009 levels, we note that although consumer discretionary, healthcare and consumer staples are much above March 2009 levels, industrials, energy and telecom are much below,” the research note said.

Credit Suisse said that the stock markets have reacted accordingly to the December quarter earnings. Gains from the sharp rally in investment-driven stocks that started on 6 September 2012—around the time that the government action on economic reforms grabbed headlines—have already disappeared. Metal stocks had also rallied, in line with a global rally in risk, but have now given up most of those gains, it added.

While the slowdown in investment activity has been prolonged and well-flagged, Credit Suisse said, commentary from companies did not suggest any bottoming out or inflection. It said, “In fact, results showed that construction activity, steel and cement demand, and even order books slowed during the quarter. BHEL, the bellwether power equipment manufacturing company saw its first YoY revenues declined in a decade. Even Larsen & Toubro (L&T), which surprised positively on the growth in its order book, had to rely on gaining market share in the middle-east and in real-estate construction orders and its own assessment of the investment environment was not positive,” the note said. 

Credit Suisse said, below the operating profit line, the pressure from interest costs continued to rise (up 40% YoY in the December quarter), because projects are now starting to get commissioned, and capitalised interest is now appearing on the profit and loss (P&L). Worryingly, interest coverage continues to get worse.

Overall, FY14 earnings fell 2.3% during the earnings season. Credit Suisse said its analysts cut estimates across the board for FY14, though continuing with past trends the cuts in FY15 were more muted except for a few sectors. Earnings for Technology, Utilities and Private sector banks were upgraded.  Interestingly, earnings estimates for consumer staples as well as consumer discretionary stocks were downgraded quite meaningfully: in case of the former, it was primarily the royalty impact on HUL, it added.